YB Currency Update – Thursday 20th August 2009

There’s a lot of nervous youngsters awaiting their ‘A’ level results this morning, and with the recession hitting the job market for the young disproportionately, many are applying for university as a safe haven to ride out the rough patch, even when they know how much debt they will accrue when they leave the education system. Many will miss out, but the higher number applying for places will no doubt be used by the Government as a sign of the success of their further education policies, which is a bit of a cheek, unless their policy was to crash to economy in order to make going to university more attractive. 40% of American school leavers go on to further education, as opposed to just over 20% in the UK, and with globalisation taking lower skilled work to were labour is cheapest, a ‘knowledge based economy’ (to use a government phrase) is essential, not that thousands of media studies graduates are the kind of knowledge any employer needs (In the interest of full disclosure my own degree was not in a stellar discipline).

Traders were much less nervous than today’s school leavers, ahead of yesterday’s MPC minutes, which were expected to be in line with expectations, but actually surprised the markets showing that the vote to extend QE by a further 25 billion, to 50 billion, was split 6-3, with the three dissenting voices, which included Mervyn King, voting not to keep QE as it is, but to actually extend it a further 50 billion. The MPC wouldn’t have seen this weeks CPI figure before voting, so it is perhaps good for the overall reputation of the committee that Mervyn’s faction was defeated, but the vote shows that there is a significant minority of the MPC who would like to extend the program further, and this raises the likelihood that the MPC may not have finished extending QE just yet. The split vote had the expected effect on Sterling causing it to drop down below 1.64 against the USD before bouncing back in the afternoon. The Pound also dropped against the Euro falling back towards 1.16.

In the afternoon Sterling did recover slightly, not through any good news on the UK economy, but due to global risk appetite, as better corporate earnings reports in the US, and an uptick in weekly mortgage application figures helped stock markets rise. Energy stocks were one of the best performers as oil prices rebounded 5%, back above $74 per barrel. This helped the Pound clamber back a bit of it’s losses, and it opens this morning around 1.6550 against the USD, and just under 1.1650 against the Euro.

The big event for the UK today is the latest retail price data, which are expected to rise, although not bay as much as the previous month, with July’s weather proving a disappointment. The expectations are for a 0.3% rise on the previous month’s figures and this may be a little optimistic, with a lower figure once again causing some short term volatility. We also have the public sector borrowing figures, and I’m sure no-one needs me to tell them that they are likely to be horrendous with the government borrowing heavily to pay for it’s many fiscal stimulus schemes, they will also get some insight to how effective the QE measures have been with the M4 money growth figures. It will be the retail sales which dominate thinking this morning and a weak or strong figure could give shape to the rest of the day’s trading.